Where Is Housing Headed?

Home prices showed signs of stability in April after several months of declines, according to a report Wednesday from CoreLogic Inc.

CoreLogic’s home price index showed that home prices increased by 0.7% in April from March, even though they were down 7.5% from one year earlier, when sales were being boosted by tax credits. The report came one day after the S&P/Case-Shiller index showed that home prices declined in March to a new post-bubble low.

What’s going on here?

These and other home prices indexes, which track repeat sales, tend to be heavily influenced by the share of distressed sales, as we’ve noted before. That’s because banks tend to cut prices in order to quickly sell foreclosures. As the distressed share rises, price indexes are likely to report larger declines.

CoreLogic provides one index that excludes distressed sales, and it has shown little movement—up or down—in home prices recently. Excluding distress, prices were down 0.5% in April from one year earlier, and down by 1.6% in March. By comparison, prices were down 7.5% and 6.8%, respectively, when distressed sales are included. All but six states declined when including distressed sales, but 20 states showed increases if distressed sales are excluded.

The numbers could explain one of the big standoffs restraining the housing market in recent months: Buyers are demanding deeper discounts than sellers think they should have to offer.

A better gauge of what’s happening to prices in real time is to look at pending sales, which usually track future sales activity. The National Association of Realtors last week reported a surprisingly sharp 11.6% drop in pending home sales for April, which should show up in May and June sales.

Most analysts believe that home prices, which are down around 30% from the peak, are near bottom, absent any further deterioration in the economy. While banks will continue bringing hundreds of thousands of foreclosures to market in the coming years, affordability has fallen back to pre-bubble levels.

Home sales “are not obviously misaligned with fundamentals,” wrote Goldman Sachs economist Zach Pandl in a note Tuesday. He says that given mortgage rates, job market conditions, and household formation, home sales shouldn’t deviate too far from current forecasts in the coming months. Any significant decline in sales “would likely require a shift in fundamentals: higher mortgage rates, a further deterioration in perceptions about house prices, or a weaker job market.”

The prospect of a double-digit drop in prices in 2011 has grown remote, says Glenn Kelman, chief executive of Redfin Corp., largely because banks have been slow to list foreclosures and sellers haven’t stepped in to fill the gap.

The bottom line: Prices appear more likely to bounce along a bottom rather than plunge precipitously as they did in 2007 and 2008. Housing indexes may show ultimately show this, though foreclosures could cloud the picture for now.